- Legal disputes up another 150% in a year
- Professional and lay trustees alike being sued
Legal disputes over assets, such as property and shares, held in trusts have continued to soar as fall-out from the stock market and property market slump continues says Wedlake Bell, the City law firm.
Disputes launched in the High Court in London over property held in trust, jumped 152% in the last year to 111 (year to Dec 31 2010) up from 44 in the previous year. In 2007, before the credit crunch took hold, there were just three such cases which reached the High Court in London.*
Trusts are widely used in the UK to hold assets for the benefit of third parties (beneficiaries - frequently family members).
The collapse in the value of many investments held in trusts, such as shares or residential property has led to a surge in the number of beneficiaries of these trusts suing their trustees for mismanagement.
As many cases are settled out of court the number of High Court cases is understood to be just the tip of the iceberg. The trustees being sued will range from professional advisers and banks through to family friends and relatives who may have taken on the role of a trustee as a favour.
Fay Copeland, Head of Private Client Team, of Wedlake Bell says: "The extreme volatility of the stock markets and other asset classes will have created a lot of big investment losses. Beneficiaries will want to recoup that lost money and suing the trustees is seen as one solution."
"This kind of litigation is more likely to succeed where it can be shown that the investment loss has been exacerbated by the mismanagement of those assets."
"A lot of trustees are amateurs or "lay" trustees, possibly a member of the beneficiaries' family, but unfortunately that doesn't provide them with a great deal of legal protection. Trustees have a duty to their beneficiaries which includes ensuring that the trust assets are properly managed. If the trustees themselves are not qualified investment managers then they must appoint proper advisers and ensure that those advisers are doing a good job."
Fay Copeland explains that trustees can be sued even where the trustee has outsourced the management of the trust's assets to a professional fund manager. "If the fund manager has been performing badly you could be sued for failing to replace the fund manager or you might find yourself blamed for allowing a fund manager to take too risky an investment strategy."
Explains Fay Copeland: "If it is found that the trustees have been negligent in the management of a trust's assets then they could face a potentially ruinous claim."
"A lot of lay trustees agree to take on the role without really understanding the legal risks or the fact that they might personally be liable to reimburse the trust fund for losses. They never imagine that they could be sued just for failing to keep up with what can turn out to be an incredibly complex job. It is not a role to be taken on lightly."
"The big investment losses that some trusts have experienced have also led to the identification of cases of alleged fraud. You can get asked to look into a poorly performing trust and find that on top of the investment losses there have been hands in the cookie jar."
Fay Copeland says that another problem that beneficiaries have complained about is where the role of the trustee is played by a professional trust company or bank which then appoints its own fund management arm to invest the assets. If this fund management arm underperforms then there can be a reluctance to remove that fund manager as they are part of the same company.
Some beneficiaries worry that trustees that are banks or wealth managers allow the fund manager to make their investment decisions based on the commissions they will make.
Adds Fay Copeland: "If a portfolio is made up of high commission but poorly performing products then alarm bells should ring."
High Court disputes (Chancery Division, London) over assets held in trust - number per year
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